Forget the scene of fellow G7 leaders at the Bavarian Summit and ask difficult questions. What if Russia shuts off gas to Europe?
If we have learned anything in the last four months, Europe needs to plan the most extreme consequences that could result from the invasion of Ukraine. And among those extreme consequences is the complete interruption of the gas supply.
This is really an upcoming winter issue. The usual pattern is that resources accumulate in the summer and are depleted when cold weather strikes. Looking at Europe as a whole, about 40% of its gas was imported from Russia in 2020, with some countries such as Latvia importing everything from Russia, while others such as Ireland do not. .. The UK produces about half of the gas from the North Sea and imports seven from Russia.
Germany has taken 65% of its gas from Russia and reduced its imports, but as it is the world’s largest gas importer, its response is of utmost importance.
Last week, German Minister of Economy Robert Habeck announced that the country would move to the second phase of a three-stage emergency plan to reduce gas demand. At this stage, more coal can be used to generate electricity, allowing utilities to charge higher prices and encourage customers to reduce consumption. Stage 3, if that happens, it will be ration. The purpose in that case is for the industry to reduce on demand and allow households to maintain heating during the winter.
The European Union is also planning ways to survive the winter with less supply and will announce details next month. Ursula von der Leyen, President of the European Commission, said: “The best is always to expect the best and be prepared for the worst.” So can Europe survive the winter without Russian gas? Theoretically the answer is yes, but it actually means a serious recession. In February, shortly after Russia began its invasion, Bruegel, a Brussels-based think tank, calculated what would happen.
Fortunately, Europe has already diversified away from Russia, and imports of liquefied natural gas (LGN), especially from the United States, surged in 2021. Qatar was the largest supplier, but it looks like the United States will pass this year. It is not only the largest supplier to Europe, but also the largest exporter of LGN in the world.
The bad news is that Europe does not have enough specialized port capacity to import LGNs. There are no LNG facilities in Germany, but three have been proposed. There is a lot of opposition planned for the construction of the terminal, and in any case it is not possible to physically do so in time for this winter. Therefore, less gas needs to be used in Germany, and in fact throughout Europe.
The German Institute for Economic Research (DIW Berlin) argues that this is the country’s long-term self-interest to reduce gas demand, concluding: Natural gas in the electricity sector can be replaced with alternative energy sources in the short term, but industrial savings are accompanied by reduced production. “
Decline in production. Oh, there is friction. The institute argues that particularly affected industries should be compensated, and continues: “For individual households, natural gas can only be saved by reducing energy demand, so energy conservation campaigns are needed as soon as possible. In addition, measures to increase energy efficiency and facilitate the switch to renewable heat (heat pumps). (In combination with) should be done immediately. “
This argument is certainly correct in the medium term, but admitting that production cuts are needed and taxpayers have to compensate companies for those cuts means that Germany will lose production. increase. Some combination of lower real wages or higher unemployment.
If the factory is forced to close, it will not be reopened. Production will be shifted offshore. Therefore, Russia’s gas cutoff undermines Germany’s economic model. You don’t have to believe in the horrifying stories of self-confidence collapse like Lehman Brothers to acknowledge the very serious headwinds facing Europe in general, especially Germany.
But let’s end up with a silver lining to a very dark cloud. Since World War II, Germany has addressed many economic challenges, including rebuilding from rubble, overestimating Deutsche Mark, and the cost of raising the former East Germany to Western European standards. After all, it has always been stronger. I’m more worried about the rest of Europe. And I hope the coming winter is not too cold.
Hamish McRae’s new issue, World in 2050Bloomsbury Publishing